The FDI angle

• Reinvested earnings made up over $190bn of US foreign direct investment (FDI) financial flows in 2023.
• Reinvested earnings share rose from 17.6% in 2016 to 66% in 2023, per BEA data.

Why it matters: Reinvested profits indicate strong expansion of existing foreign operations in search of higher returns but also signals fewer new equity investments and fresh capital in the US.

Reinvested earnings have become a more prominent source of FDI into the US as the country’s economic growth shores up rates of return while the cost of new capital for investment remains high. 

More than $190bn of total FDI financial flows to the US was made up by reinvested earnings in 2023, the second-highest level after the $212bn recorded a year earlier, according to official balance of payments statistics produced by the Bureau of Economic Analysis (BEA). 

Reinvested earnings are the difference between a subsidiary’s US earnings in a given year and the dividends it sends back to its parent company in that same year. 

They have been growing in relative terms too. The share of reinvested earnings in US FDI financial flows has risen from 17.6% in 2016 to 66% in 2023, according to fDi calculations of BEA data. Over the same period, FDI financed through other forms of equity fell from 70.5% to 40.2% while the net contribution of debt was negative for 6%.  

Rising returns 

A major factor that influences multinationals’ decisions to reinvest locally the profits of their subsidiaries traces back to the rate of return on that investment. According to the latest data produced by the BEA, the internal rate of return on inbound FDI hovered around 6% in both 2021 and 2022, the highest level since 2014, as the US economy led other major developed economic blocs in economic recovery after the Covid-19 pandemic.  

In this perspective, reinvested earnings tend to be a better indicator of actual investments and are less volatile than debt and other forms of equity in FDI, argues Jim Renzas, North America director of BCI Global, a consultancy. They are “more reflective of real investments in the economy as foreign entities reinvest their US earnings into expanding capacity and global footprints”. 

Rising reinvested earnings FDI to the US is also reflective of policy changes and corporate strategies. 

The Tax Cuts and Jobs Act (TCJA), which came into force during the Trump administration in 2018, cut the corporate tax rate from 35% to 21%, which boosted the net profitability of US subsidiaries of foreign companies. 

A 2022 IMF paper found that both retained earnings FDI and investments in property, plant and equipment “responded positively to the TCJA reform, but FDI financed with new equity or debt did not.”

More on US FDI:

• US manufacturing FDI falls to decade low
• US steel heartland leaders hit back at Nippon saga
• Is America's heartland up for grabs?
• US battery energy storage investment surges

Research by Erwin Hansen and Rodrigo Wagner, two Chilean economists, shows that countries with higher inward FDI stock tend to have a higher level of retained earnings FDI too. But they caution that higher retained earnings FDI does not necessarily translate into higher capital expenditure.

“By looking at retained earnings FDI alone there is no way to know whether this company’s liability ends up in a mirroring investment in fixed assets, such as machines and property, or in current assets like cash,” said the economists.  

New investors at bay? 

Strong rates of return should typically drive new equity investment in any shape and form. The fact that reinvested earnings in the US are on the rise, while other types of equity investment, mainly in the form of fresh capital injections from overseas, are dwindling adds nuances to the current sentiment of the community of investors in the US.  

Jonathan Samford, executive vice president at the Global Business Alliance, a US foreign investor association, argues this trend concedes that “companies that have operated in the US for decades are reinvesting their profits into their US operations” and propelling FDI growth. But, he adds, it also “suggests that would-be investors have been kind of sitting on the sidelines”.

The higher interest rates of the past couple of years, which increase the cost of both equity and debt capital and thus makes capital expenditure more expensive, and greater scrutiny of inbound mergers and acquisitions through Cfius, the US FDI screening mechanism, are all contributing to a more difficult environment for companies seeking to enter the US for the first time.  

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